Records are less hard to come by in current stock markets, as a cursory glance at the financial press will tell you. In July and early August, record highs in many of the world’s top indices were occurring almost daily. The JSE, too, joined the sequence of new all-time highs, while the likes of Frankfurt, London, Toronto, Mumbai and others have enjoyed record highs in recent months.
The Dow Jones Industrial Average (which is not an index, strictly speaking, but an average) in early August ended a winning streak of 10 consecutive record closes, giving it 35 all-time highs for the year until then (it has failed to add to that tally). It all sounds impressive – and US President Donald Trump did not miss the opportunity to tweet about it and even claim credit.
However, it’s still only halfway to the 70 record highs that were notched up by the Dow in 1995. The 35 all-time highs would also place it only 16th in the list of years with the most record highs. Indeed, new record highs have been a feature of the market in the past few years, with a bull market going back to 2009. (By comparison, the S&P 500 has achieved 30 all-time highs this year and the Nasdaq 44.)
This brings us to the question of significance and whether it should matter to investors. It should be noted that these records are what economists call “nominal”: levels for indices (or stock-market averages) don’t adjust for inflation in the currency in which they are measured. Thus a very different picture may emerge when one deflates by a consumer price index to get the “real” number.
They also don’t give you a steer on the valuation of the underlying components, as measured by ratios like the forward price/earnings (PE) multiple. According to Yardeni Research, the S&P 500 is trading on a 12-month forward PE multiple of 17.7 times. This is high, but not ridiculously so (the index was on a forward PE of 24 times in 1999 and 2000), while a number of sectors are still below this, like financials (13.8 times) and healthcare (16.2 times). Granted, the likes of consumer staples (20 times) are ahead. An investor would have to take a view on the earnings outlook for the shares in the index or average to decide whether the new highs are something to cheer about. August’s new highs were set on the back of good earnings numbers, so it appears the market is comfortable with the valuations.
In any event, the mere phenomenon of a new stock-market high is no harbinger of future moves, at least not in the short term. After the 70 record highs in 1995, the Dow continued to rise in the following years. However, you do sometimes need to be as patient as a long-jump or 400m aficionado to witness a new record. Nasdaq investors had to wait almost 15 years from its 2000 high (set just before the famous crash) to see it pass this level again, while investors in the Japanese share market are still waiting for the Nikkei to get anywhere close to the 38,000 it achieved in 1990 – it’s still only halfway there.
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This article was paid for by Investec. Any views expressed in this column are those of the author and may not necessarily represent those of Investec Wealth & Investment.